The Labour party will be led down a blind alley if trade unions succeed in banning Progress, a pressure group associated with Tony Blair, the former business secretary Lord Mandelson warned on Sunday.

As the Labour leadership dismissed the move by the GMB union, Mandelson warned of a danger of a return to the "divisiveness, falling out and rancour" of the 1980s.

Mandelson spoke out after Paul Kenny, the GMB general secretary, announced that his union was drawing up a motion to ban Progress from the party. A strategy document drawn up by the Unite union last year said that Progress, which is funded by Lord Sainsbury, promoted old thinking and neo-liberalism.

Ed Miliband has also spoken out against Kenny. The Labour leader told his party's national policy forum on Saturday: "Progress is a good organisation, and I spoke to a Progress conference a few weeks back. I'm for a Labour Party that's reaching out to all people and all organisations, not having fewer associations."

Jon Cruddas, the Labour party's new policy chief, told the Observer that he hoped to involve leading members of Progress in his policy review. Cruddas spoke of "reforming the band" as he said he would make contact with David Miliband and James Purnell who worked with him in Downing Street during Tony Blair's first term in office.

Mandelson, a strong supporter of Progress, strongly endorsed Miliband. He told the Andrew Marr Show on BBC1: "Trade unions need to rethink and remake themselves for a new century. If they become in a sense more representative of their membership as a whole they would not be leading either themselves or the Labour party down what I regard as a pretty blind alley."

The GMB described Progress as a "party within a party" and likened it to the Militant tendency, the Trotskyite entryist group whose members sought to deselect a series of Labour MPs in the 1980s.

Mandelson first made his name as a senior aide to Neil Kinnock, who successfully drove Militant out of the Labour party, and he turned the tables on the GMB as he too warned of a danger of returning to the 1980s.

"We don't want to have a political party of intolerance, of renewed divisiveness, of falling out and rancour of the sort we saw in the 1980s. I think that all of us want to put that behind us. Nor do I think is it right to view Progress as an organisation as some sort of Blairite faction. It's not looking to the past, it doesn't want to recreate the New Labour model of the past. It's forward looking, it's progressive, it's modernising and it wants to commit to the best possible platform on which we can fight and win the next election. Perhaps that's why the trade unions don't like it."